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Wages Series Part 1: Salary vs. Hourly

Deciding whether to pay your employees a salary or hourly wage must be based on the laws where you are located. The primary regulations are laid out in the Fair Labor Standards Act (FLSA), which you can find at http://www.flsa.com/coverage.html. It provides the federal regulations regarding these two categories, and lays out the rules for overtime pay.

Salaried Employees Are Exempt from Overtime Pay

Salaried employees are paid a set rate for the pay period, whereas hourly employees are paid for the amount of time they work. When salaried employees don’t have enough work to keep them busy, they will still be paid the full amount specified in their contracts. However, should they work more than their standard full time schedule (typically 40 hours per week), it is not required to pay them any more, though an employer may choose to do so.

The term “exempt” is often used as a shorthand way to refer to salaried employees, and it refers specifically to their jobs being exempt from overtime pay regulations.

Hourly Employees Must Be Paid for Overtime

Hourly employees who work more than 40 hours a week must be paid one and one half times their normal rate for the excess time.

Qualifications for Salaried Positions

To protect workers’ right to overtime pay, there are three criteria which must be met for a job to qualify to be exempt. These are:

Salary Level Test – Employee must be paid at least $23,600/year

Salary Basis Test – Employee will receive a “guaranteed minimum”

Duties Test – Job must be executive, professional or administrative and require relatively high-level work.

The full descriptions of each test are included on the FLSA website at the above link.

Other Regulations Are the Same for Both Categories

Regardless of whether a worker receives a salary or hourly wages, there are some regulations that are the same. For example, tax liability is usually the same because both salaries and hourly wages are earned income. Similarly, both exempt and nonexempt employees are usually eligible for unemployment.

It is important to consult with an HR or labor law professional before putting an employee in a salaried position, as failure to properly pay overtime wages can result in an expensive lawsuit, in addition to reflecting poorly on the HOA.